OECD Submission to the Talanoa Dialogue: “How do we get there?”[1]
2 April 2018
The Organisation for Economic Co-operation and Development (OECD) welcomes the opportunity to inform the discussion in the April/May session of the UNFCCC Talanoa Dialogue. The Dialogue will respond to three important questions[2]: Where are we; Where do we want to go; and How do we get there?
This submission will focus on the third question, How do we get there?, by drawing on OECD work highlighting how countries can overcome barriers to undertaking climate action. Disseminating such policy advice alongside specific success stories could help other countries in their efforts to move to low-emission, climate-resilient development pathways.
We need to act now
The scale and pace of climate change is rapidly moving the natural systems that underpin human wellbeing into uncharted territory, with the potential for severe and irreversible impacts. Strong climate action is therefore not a threat to, but rather the foundation of, our future economic well-being.The recent OECDreport Investing in Climate, Investing in Growthhighlights that strong climate action is compatible with economic growth. Bringing together the growth and climate agendas rather than treating climate as a separate issue could add 1% to average economic output in G20 countries by 2021 and lift 2050 output by up to 2.8%. If the economic benefits of avoiding climate change impacts such as coastal flooding or storm damage are factored in, the net increase to the level of 2050 GDP could be nearly 5%.
Greenhouse gas (GHG) emissions in one part of the world affect the climate globally, so any effective and sufficient response to climate change must be multilateral in nature. The Paris Agreement is an international legal instrument with the potential to measure up to the scale and urgency of the climate challenge, but governments must overcome significant challenges if its potential is to be met and finance flows are to be made consistent with a pathway towards low-emissions, climate-resilient development.
In aggregate, current action and commitments on GHG emissions are inadequate to put the world on an emissions pathway that would limit the average global surface temperature increase to the Paris goal of well-below 2°C, let alone towards 1.5°C. Efforts need to be both scaled up and accelerated so that a peak in global GHG emissions is achieved as soon as possible, with rapid reductions thereafter towards zero or perhaps even negative net emissions in the second half of the century. In addition to ambitious domestic action, this will require international climate finance and other support for climate action by developing countries, in line with international commitments. Since climate impacts are already occurring and may be severe even if the Paris goals are achieved, major efforts are required now to enhance resilience and adaptive capacity. Holistic planning and coordination is needed to improve policy coherence across the interlinked issues of climate change policy, food security and biodiversity conservation.
Governments alone cannot solve climate change. Success will depend on the transformational actions of many other organisations, institutions and individuals, including businesses, financial institutions and regulators, cities, social and labour organisations, researchers and innovators. Governments need to enable and support these efforts, including by sending a clear policy signal that the transition to low-emissions climate-resilient development pathways is irreversible.
Countries need to identify and communicate their targets and ensure policy alignment
To achieve the scale and pace of reductions required to meet the Paris temperature goal, short-term Nationally Determined Contributions (NDCs) need to align and be coherent with the transformational national emissions pathways required by 2050 and beyond. Some far-sighted countries have formulated strategies for 2050.[3]For example, Mexico aims for a 50% reduction in emissions by 2050 relative to 2000; Germany aspires to “extensive greenhouse gas neutrality” by 2050. The European Union has committed to reducing emissions by 80% relative to 1990 levels by 2050. Its NDC provides greater granularity on what its Member States should do by 2030 to achieve this.
Policy alignment is central to effective climate polices. Among the most important obstacles to effectively combatting climate change is the fact that existing policy frameworks and economic interests continue to be geared towards fossil fuels and carbon-intensive activities, as coal, oil and natural gas have fuelled global economic development for centuries. Inadvertently or not, this creates a misalignment between existing policy frameworks and climate objectives, hindering low-carbon investment and consumption choices.[4]Policy action needs to go beyond core climate policies to address policy misalignments across the economy, in areas such as trade, investment, fiscal and innovation policy, and across electricity, transport systems and land use (see text box 1).
Text box 1: Recommendations on policy alignment and structural reforms[5]Integrate the climate imperative into structural reform and broader national development
strategies, reflecting the role of our physical environment as a fundamental pillar for strong,
sustainable, balanced growth.
- Pursue a whole-of-government approach to low-emission, climate-resilient growth and
environment, particularly in infrastructure sectors, using the OECD publication Aligning Policies
for a Low-carbon Economy as a starting point.
- Improve understanding and management of the interdependencies between climate change
health and well-being, which are vital to achieving the Sustainable Development Goals.
- Implement structural reform policies that boost both productivity and economic activity, as well
reallocation; faster technology development and diffusion; greater dynamism in labour markets;
and measures to facilitate firm entry and exit.
- Reassess and optimise national fiscal policies to increase investment in low-emission,
the potential of fiscal measures to revive economic growth and strengthen climate-friendly
investment signals.
- Continue to develop relevant metrics and analytical tools to incorporate the impacts of
move towards a more sustainable long-term growth model.
Brazil is an example of a country that is taking steps to improve policy alignment for the transition. Brazil has developed a comprehensive strategy for reducing GHG emissions. It launched climate change programmes inareas such as energy, iron and steel production, agriculture and deforestation control. Brazil is also developing a system to monitor the implementation and effectiveness of theseprogrammes, as well as a climate change adaptation plan.[6]
Policy alignment for combatting climate change is also occurring at the municipal government level. In 2012, the Seoul Metropolitan Government launched its flagship energy policy, One Less Nuclear Power Plant, inresponse to concerns over the city’s high dependence on energy imports, vulnerability toclimate change impacts, and need to transition to a low-carbon economy. Thecomprehensive energy plan aimed to reduce the city’s energy consumption by 2 milliontons of oil equivalent –the amount of electricity produced by anaverage nuclear power plant in Korea – by the end of 2014 through the introduction ofenergy efficiency and conservation measures and the production of new and renewableenergy. This target was met in June 2014, six months ahead of schedule.[7]
We need to invest in clean, resilient infrastructure
Significant investment in clean, resilient infrastructure is essential to the transition towards a low-emissions economy.The quality of infrastructure is declining in many advanced economies, public capital stock is shrinking in some countries, and more infrastructure investment is needed in developing countries to achieve universal access to energy and basic public services. For infrastructure to be consistent with anemissions pathway that has a 66% probability of limiting warming to well below 2°C, investment need would be around USD 6.9 trillion per year in the next 15 years, an increase of about 10% in total infrastructure investment from the reference estimate (see Figure 1). This covers investment in transport, water and sanitation as well as energy supply and use. Given the long lifespan of infrastructure, it is important to invest in the right type of infrastructure in order to avoid either locking the world into a GHG-intensive development pathway or riskingthe stranding of many assets (see text box 2).
Text box 2: Policy recommendations on infrastructure investment[8]Infrastructure investment is vital to underpin economic growth and development, but
current levels of investment are inadequate. Meeting the Paris Agreement’s mitigation and
adaptation objectives will also require a radical shift in the world’s infrastructure base.
- Expand efforts to mobilise private investment in low-emission, climate-resilient
- Make greater use of public procurement to invest in low-emission infrastructure and to trigger industrial and business model innovation through the creation of lead markets, for example by introducing climate-related criteria to procurement decisions.
ensure that these approaches are robust given the uncertainty surrounding climate changes effects
at local and regional levels.
- Establish a pipeline of infrastructure projects that are consistent with long-term, low-emission
goals, as a means to shift investment to climate-resilient infrastructure
- Bridge data gaps on infrastructure projects and improve information on investment pipelines,
- Introduce specific policies and regulations, such as spatial planning and technical standards,
risks in public investments, including procurement procedures.
Figure 1. Annual infrastructure needs and fuel savings in a low carbon future
Source: Investing in Climate, Investing in Growth Synthesis Report (OECD, 2017)
Encouragingly, countries are increasingly considering adaptation and mitigation in their infrastructure plans, which is key to mainstreaming climate into long-term planning. Some countries, including Australia, Brazil, Canada, India, Japan and the UK, include both mitigation and adaptation in their infrastructure plans (Table 1). Brazil has developed infrastructure plans that provide a budget and targets for their energy, transport, water, and agriculture sectors.[9]
Table 1. Overview of infrastructure plans in the G20 countries
Source: Investing in Climate, Investing in Growth (OECD, 2017)
A key aspect of infrastructure investment centres on renewable energy.New analysis of the current existing capacity and current pipeline of power plants in G20 countries indicates that a shift towards investment in renewable energy has started and is likely to continue in the next 15 years (Figure 2), as two-thirds of the global capacity under construction is based on renewable energy technologies.G20 countries are collectively leading the transition: they are home to 98% of global installed capacity of wind power, 97% of solar photovoltaic (PV) power and 93% of electric vehicles.
Figure 2.Current capacity and current pipeline of power plants relative to those required in a scenario with a 66% chance of limiting warming to below 2°C
Source: Investing in Climate, Investing in Growth Synthesis Report (OECD, 2017)
Examples of a shift towards renewable energy exist worldwide. This is frequently observed in conjunction with a shift away from fossil fuel sources, such as coal, in order to compensate for a shifting energy mix. For instance, the UK is drastically expanding its offshore wind capacity. At present, there is a cumulative capacity of 15.78GW of offshore wind, which is predicted to reach 25GW by 2020 as investment continues.[10]Offshore wind meets around 5 percent of the annual UK electricity requirements and is expected to grow to 10 percent by 2020.[11] This complements the UK policy to close all coal power stations by 2025, and a rapid decline in coal production from 2.8-million tonnes in 2015 to 22,000 tonnes in 2016 with the closing of the last deep coal mine in the UK.[12]
India is in the midst of a solar power revolution, with government proposals to install 215 GW of renewables by 2027. The combination of the current low capacity utilisation rate of several coal power plants and the declining cost of renewables has caused many financial backers of coal projects to withdraw support. Construction activity is now on hold for 31 coal plant units totalling 12 725 MW of capacity, mainly due to frozen financing.[13]
Denmarkaims to be independent from fossil fuels by 2050. It has historically relied on coal as its main energy source in power generation, but is shifting towards renewable sources such as wind power. In fact, the share of coal in Denmark’s power generationfell drastically, from 54% in 2006 to 28.8% in 2016.[14]
Another example is the phase out of coal power generation in Canada’s largest province, Ontario – a heavily industrialised province the size of France and Spain combined.[15] Coal was reduced from 25% of Ontario's energy supply mix in 2003 to zero in 2014, largely replaced by a combination of nuclear and renewables.[16] While the primary objective of the coal phase-out was improving air quality, the phase-out was also a main contributor to the 34Mt reduction in emissions observed in Ontario between 2007 and 2014.[17] Often climate action has other positive impacts, as with this example and air pollution. Recent work estimates that by 2060, the impacts of air pollution, which include impacts on labour productivity, health expenditures and agricultural crop yields, are projected to lead to global economic costs of 1% of GDP.[18]
An expansion of carbon pricing, in combination with a phase-out of fossil-fuel subsidies, have significant potential to further reduce emissions
Carbon pricingrefers to carbon taxes and emissions trading schemes (ETS). While not in itselfsufficient to deliver the degree of abatement required for limiting the risks of climate change, carbonpricing is an essential part of the solution. It is a policy instrument that needs to be deployed more widely if we are to meet our climate change mitigation commitments. In combination with an expansion of carbon pricing, countries should phase out costly fossil fuel subsidies in order to ensure carbon is priced appropriately.
Text box 3: Policy recommendations on fossil fuel support and carbon pricing[19]- Accelerate the reform of inefficient fossil-fuel subsidies that encourage wasteful
reform, expand internationally-comparable information on subsidies to more countries
and types of support, for example through peer review. Share experience on successful and
progressive subsidy reforms.
- Broaden the carbon pricing base, track impact and emissions reductions progress, and
decisions.
- Explore joint action in this area, such as minimum carbon prices, gradual increases
There is significant scope to increase carbon pricing, both in terms of sectoralemission coverage and price. Currently, carbon pricing has primarily targeted the transport sector and therefore leaves room for increased coverage in other sectors. The May 2017 report by the High-Level Commission on Carbon Prices estimated that carbon-prices consistent with achieving the Paris temperature goal need to be US$40–80 per tonne of carbon dioxide by 2020 and US$50–100 per tonne by 2030.[20]A recent OECD analysis for 41 OECD and G20 countries highlighted that road transport has comparatively high effective carbon rates, with 46% of emissions priced above EUR 30 per tonne of CO2 and only 2% of emissions unpriced.[21]However, this same report highlights that for sectors outside road transport, 70% of GHG emissions are not priced at all and only 4% of emissions are subject to an effective carbon rate above EUR 30. These sectors, which include the industry, electricity and commercial & residential sectors as well as off-road transport and agriculture & fisheries, emit 85% of carbon emissions from energy use in the group of 41 countries.Encouragingly, the number of jurisdictions with carbon pricing mechanisms in place is growing each year. As of 2017, 42 national and 25 subnational jurisdictions are pricing carbon.[22]We can draw on some of these jurisdictions to find positive ways forward.
The European Union’s Emissions Trading Scheme (ETS) is a key carbon pricing scheme. This ETSgoverns the GHG emissions from 11,000 power and manufacturing plants in 31 countries, covering 45% of the EU’s GHG emissions. It is currently the largest ETS in the world and has led to a reduction in industrial carbon emissions of 5% since 2005, and is estimated to drop 21% below 2005 levels by 2020 and 43% below 2005 levels by 2030.[23]Furthermore, research has found that there have been no detrimental effects on economic performance and that, in fact, the ETS has been partly responsible for the increase in low-carbon cleantech innovation since 2005.[24]
Fossil fuel subsidies are environmentally harmful, costly, and distortive. Not only do fossil-fuel subsidies undermine global efforts to mitigate climate change, but they also aggravate local pollution problems, causing further damage to human health and the environment.[25]Phasing out fossilfuel support results in a dual benefit of addressing climate policy objectives to reduceCO2 emissions and local pollution, and raising public revenues.[26] Recent analysis has highlighted that policies supporting the production or consumption of fossil fuels in OECD and eight partner countries (Argentina, Brazil, Colombia, the People’s Republic of China, India, Indonesia, the Russian Federation, and South Africa) amounted to between USD 151-249 billion annually over the period 2010-2016. When considered in conjunction with the national estimates of price support for fossil-fuel consumers provided by the International Energy Agency (IEA), total estimated support ranges between USD 373-617 billion over the period 2010-2015 across 76 economies, which collectively contribute 94% of global carbon dioxide emissions. Fossil fuel subsidies disproportionately benefit those with upper and middle incomes. This means that such subsidies not only translate into larger fiscal costs for governments, but are also regressive.